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,.i,t!dr,l]!!'Y - ;{\ !t'11, ch lii [email protected] NtoNEy,B-rrr-KING AND FINANCIAL MARKrrs 212001 P':r (Excellent Center) 0l-3s08t94 : The Deposit Expansion Process: The Simple Analytics (fl: y1| rlt fl r: "|] urirpi rlo rliu rtr . n I r-'l!fl:13111!."'ll i.lU) Banks & The Creation of Bank Deposits ( fr'urflr:irarflr:iilirrRurlrtrtorturnr: ). ,) r rlt ' l", tvuu -_.. '_--- turf)r: i1<r Banking Svstern r -n-- .F- ^ -+-f-l\. t /. t- tj nr:rltio o{ rlirrslGulu:yr irt; i N.l r! rnl l.;-tn'L;tat-fruil] Credit availability The Money Supply J T-accounts J A T-account indicates lhe change in the balance sheet of thc depository institution resr"rlting from a qilen event. ,i, ( uaq{nr: rlfi au r nJ n r 1u r r q n 1u an rrilriir r.lr nr-l'rr fi,irilu n rrlr l r,r r r'r q n li ni;1r.r 1; ) Suppose :o$ !j9ji!!9)[email protected]!! lends $10,000 to a local shoe-storc orvner 1bi tl.ie purpose of increasing her inventories. 1 turnr:ilriou{ 1#fronr: hJalluh dudr ) .f Hometown bank has created $10,000 in new money: ( aixr.r^uixri ) LrrltY Demand deposits + 10,000 nouldietlrr:ld'in,iiou:,,,R-,., dri',n tr',i",eio n" t,.,rrlri Downloaded from ABACTODAY.COM
.U rlv r.l 1/1ad rr]ru !! lllLD lflllu in lu rn ill ifi z rb L't- r' ) l&Nil t :: ' i. Writing a Check (rli!fiourfifl) "Lending"nr:rJriorrj + A $ 1 0,000 check drarvn on her account at Flometown Bank is sent to a shoe manr:fhcturer ril St. Louis. . .J ' ' a L4 [email protected] t - I ( drlr:!ro0ulafl nlfluEanuTnl: lrn']di[.11r 11]u{rdzuaa5oillll ) J When rhe check is deposited in a St. Louis bank and clears, demand deposits in the Hometown Bluk return tL1 their original, pre-loan level. i ,,,' (iuarYn !.r rl'|ttLtJt rlrNtn dS tptduS nylnfll11,fltn!ftI. r;r["rl LJ1- llrLJr]t1' tfl li ) * Demand deposits in the St, Louis bank have increasecl by $l0.UUU. r ,fiu{, I The main point: Whenever banks increase their loans--whether in the form ofcurrency or in the form oI'a demand deposit entry on the banks' boo SU of the loan. tt t\t. d a ( turnt: rioof, hi'jrrsrflun^u nio;rjrrrrrTtyfin:sudilu;u rl3r:rur.l^u lu:yl ! nsrl-,t^:l{u'h 5 y !rd'{niirx ) 2. A Bank Buvs Securities l rurnr:5o n:rar:!r:r3u = plorijrar3ir ) "Investing"nr:nrlru J Hometo*n Bank purchases $200,000 of U.S. government securities from a dealer locatcd in New YorkCiry. (rurnr:6on:rar; niunurlin:fguo ila deaier ) J Hometorvn Bank sends a $200,000 check drawn on its account rvith the Federal Reserve. d iul ( tutfi"t50s3t,! rYfl rflo tljfloutiuolntutflitnd ) After the security dealer deposits the check in a New York bank, the check is processed and cleared by the Federal Reserve System. ( dealer ril4n h}]rnt urnr:oiu uayrnonr:rni ufr{^u or r o urnr: nar{ ; When the dealer deposits Lhe check in its New York banl:, the nation's money supply rises by J + St. Louis Bank Hometown Bank Homerown Bank St. Louis Bank Hometown Ba*k - -d ( 1l::J l[U[ 11J r1.'{1]1U ) Downloaded from ABACTODAY.COM
0 l--,'[one reation :fllrjr{11r1 J J 9 r) Loans and Securities a rofi table (Elrning Assets) ( nr:rlriouil uasn.,r*%r r', ) 'lt:nifl1] |1y.1Ja 1r fl:1i:1U l9r !11r1rn!tntl ) cause banks have to maintain ,,Reserves" J Once a bark has no excess reserves, it caiii-,oi afford to lose anv reserves.

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